Where gasoline is cheap, and why it's making yours pricey
Friday May 4, 3:12 pm ET

By Steve Hargreaves, CNNMoney.com staff writer

In Saudi Arabia gasoline costs about 45 cents a gallon. In Iran it's 33. Venezuelans pay under a quarter.
These absurdly low prices are a direct result of massive government subsidies.

While these numbers are not adjusted for cost of living, it's fair to say that drivers in those countries are getting a good deal.

But it's straining government budgets. More importantly, it's not allowing the free market to do its job. Higher prices on the open market are not leading to a drop in demand, which is keeping the cost of oil high for everyone else.

"Roughly two-thirds of new oil demand is coming from countries that have subsidized oil markets," said Christopher Ruppel, a senior geopolitical analyst with the consulting firm John S. Herold. "So demand is not going to be affected if oil goes from $60 a barrel to $80."

By no means does this let motorists in the Untied States off the hook. Gasoline consumption in this country has been rising even faster than normal, around 2.5 percent annually over the last couple of months, despite average prices over $3 a gallon, close to an all-time record.

But countries where consumption is rising the fastest may be surprising.

With it's white hot economy, it's no surprise China tops the list. The country's oil demand is projected to grow 7.5 percent this year, according to statistics provided by Ruppel.

Ruppel said China still has gasoline subsidies, although lately the government has been trying to whittle them back. The average price for a gallon of gas in Beijing is $2.44 a gallon, according to the research group AIRINC, which provided all the gasoline price numbers in this story.

But the second highest demand growth isn't in the fast growing economies of India or Brazil. It's Saudi Arabia, projected to consume 5.6 percent more oil next year, according to Ruppel.

Iran is number three, guzzling 3.3 percent more.

Russia and Egypt, which Ruppel said both have heavy gas subsidies, are also high on the list.

And the raw numbers aren't small either. The Saudis used over 2 million barrels of oil per day in 2006, and the Iranians used 1.7 million. India, a faster growing economy with far more people, used 2.5 million. (By comparison, the U.S. used about 24 million barrels a day, nearly 10 times as much as India despite having a population nearly four times as small and an economy just three times bigger.)

"Maybe it's adding up," said Lou Pugliaresi, president of the Energy Policy Research Foundation.

Pugliaresi said his group hadn't done any particular studies on subsidies and how they relate to worldwide demand growth and prices, but added "There are places where it's serious, and some of those populations are big enough to make a difference."

Katherine Spector, head of energy strategy at J.P. Morgan, said the bank did a study on price supports and demand a couple years back. Not only was demand rising fastest in countries that had subsidies, it also greatly scaled back once the subsidies were reduced, such as in Thailand and Indonesia.

"A subsidy tells consumers they don't need to adjust their behavior," said Spector.

Of course, subsidies are just one factor contributing to high oil and gas prices, noted Adam Sieminski, chief energy economist at Deutsche Bank.

Sieminski pointed to all the the other reasons why oil prices are high, among them rapid worldwide economic growth, limited supply and not enough refining capacity.